Gross Income

Gross Income Meaning

Gross income is the profit margin earned by a company from its operating activities and is denoted as sales as reduced by the cost of goods sold, which means the cost associated directly with the sale of goods sold by the company.  It represents that income which an entity earns without incurring non-operating expenses such as interest, rent, electricity etc. It is reflected as a separate item in the income statement of the company as per GAAP.

Calculation

Gross Income Formula = Revenue – Cost of Goods Sold (COGS)

It can be calculated by reducing the cost of goods soldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more from the revenue of the entity.

The cost of goods sold refers to the direct cost that is incurred for the production of the goods. It includes the cost of material, labor, packaging, freight cost, and other direct costs.

All non-operating expensesNon-operating ExpensesNon operating expenses are those payments which have no relation with the principal business activities. These are the non-recurring items that appear in the company's income statement, along with the regular business expenses.read more are excluded from calculating it, and the only production linked expenses are taken into consideration.

Gross Income

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For eg:
Source: Gross Income (wallstreetmojo.com)

Examples of Gross Income

Let us understand the calculation by way of the following examples.

You can download this Gross Income Excel Template here – Gross Income Excel Template

Example #1

A company engaged in the sale of motor parts earned a revenue of $10,000 during the year.  The company incurs the following expenses during the year.

Solution

Given,

  • Raw Material Cost: $3,000
  • Labor Wages: $4,000
  • Sales Commission: $500

Calculation of Cost of Goods Sold can be done as follows,

Gross Income Example 1

COGS formula = Raw Material + Labor Cost + Sales Commission

  • = $3,000 + $4,000 + $500
  • = $7,500

Calculations

Gross Income Example 1.1
  • = $10,000 – $7,500
  • = $2,500

Example #2

A company involved in a trade of goods managed to earn revenue of $ 12,000 during the year. Also, the following extracts of the company’s books of accounts are given.

Solution

Calculation of Cost of Goods Sold can be done as follows,

Gross Income Example 2

COGS = Raw material + Labor costLabor CostCost of labor is the remuneration paid in the form of wages and salaries to the employees. The allowances are sub-divided broadly into two categories- direct labor involved in the manufacturing process and indirect labor pertaining to all other processes.read more + Freight

COGS  = (Opening Stock + Purchases – Closing Stock) + Labor Cost + Freight

  • = ($300 + $3,000 – $250) + $5,000 + $500
  • = $8,550

It is to be noted that salaries and interest expense will not form part of COGS are these are not directly related to the production of the goods.

Calculation

Gross Income Example 2.1
  • = $12,000 – $8,550
  • = $3,450

Gross vs. Net Income

Net Income = Gross Income – Expenses

Conclusion

Gross Income is an indicator of the company’s profitability of its primary business. It is an essential factor that is considered by the stakeholders while evaluating the company as it reflects how effectively a company is managing its affair. It represents the profit earned from the main business of the company.

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